The Market Is Complacent About New Russia Oil Sanctions. These Ones Are Serious.

Lukoil fuel storage tanks near the Russian coast on the Black Sea. Lukoil is subject to new U.S. sanctions placed last week. (Nikolay Doychinov / AFP / Getty Images)

About the author: Ben Cahill is Director for Energy Markets and Policy at the Center for Energy and Environmental Systems Analysis at the University of Texas at Austin.

President Donald Trump finally brought the hammer down on Russia’s two largest oil producers. His new sanctions, announced last week, target Rosneft and Lukoil—the twin engines of Russia’s oil revenue and its war in Ukraine.

So far, the oil market seems unimpressed. Traders are betting this is another instance of tough talk with little follow-through. But this time may be different: The political context surrounding the sanctions has changed. The market might be underestimating their sticking power.

After years of fiddling with ineffective price caps and Trump’s misguided secondary tariffs, the president has imposed sanctions that could have real teeth, freezing U.S. financial assets held by Russia’s largest state-owned oil producer, its largest private oil company, and those companies’ majority-owned subsidiaries. Rosneft produced 3.62 million barrels per day in the first half of this year, and Lukoil has extensive international assets including retail and distribution in Europe. Together, these firms account for nearly half of Russian crude exports.

More important for the global oil market, the Treasury threatened secondary sanctions against companies that do business with Rosneft or Lukoil. Unless those buyers can entirely evade the U.S. financial system and the long arm of the Treasury, transactions with the firms would place them in jeopardy. It is a threat that no company can take lightly. Buyers have until Nov. 21 to wind down transactions with Rosneft and Lukoil.

India will be a key testing ground for the sanctions. The country emerged as Russia’s most indispensable buyer since the war on Ukraine. It was purchasing nearly 2 million b/d of Russian crude in recent months. Now, Indian refining giant Reliance Industries claims it will comply with the new sanctions and may declare force majeure on its 10-year, 500,000 b/d term contract with Rosneft. Other privately held and state-owned refiners in India will likely follow suit, even if buyers like Nayara Energy—partly owned by Rosneft—continue business as usual.

Created with Highcharts 9.0.1Top Indian Buyers of Seaborne Russian OilIndian firms are the second largest buyer of Russian oil, just behind China.Crude oil and condensate, by thousand barrels per daySource: Kpler

Created with Highcharts 9.0.1Reliance IndustriesIndian Oil Corp.Nayara EnergyBharat PetroleumHMELONGCHPCLJan. ‘23July ‘23Jan. ‘24July ‘24Jan. ‘25July ‘2502505007501,0001,2501,5001,7502,0002,250

The threat of secondary sanctions should also reshape thinking in Turkey and other large buyers of Russian oil.

China is the most likely exception. There are early indications that Chinese national oil companies will curb imports of sanctioned Russian oil. But China’s independent refiners have absorbed most of the sanctioned oil volumes in recent years from exporters like Iran, Russia, and Venezuela. China’s so-called teapot refiners—privately owned companies—are less exposed to the U.S. financial system and the reach of Group of Seven watchdogs, so they can be expected to snap up the discounted volumes once again. Ultimately, China’s behavior uptake may have less to do with sanctions pressure and more to do with dwindling import quotas for the country’s independent refiners.

Naturally, everyone is skeptical that Washington’s sanctions are serious. For months, Trump failed to target Russia’s dark fleet of tankers carrying sanctioned oil, the offshore middlemen trading that oil, or the financial backers of this shadow trade. The White House also hasn’t enforced some of the most effective sanctions on the books. Until this summer, sanctions prevented buyers from accepting cargoes from Russia’s blacklisted Arctic LNG 2 project. But since August, China has imported 10 Arctic LNG 2 cargoes with impunity. The lack of a U.S. response has been all the more puzzling, since these volumes compete with U.S. LNG.

But political calculations have shifted. Trump finally seems to have lost patience with Russian President Vladimir Putin. Putin’s longstanding strategy of stalling, playing for time, and engaging in pantomime negotiations may have backfired. Trump last week delayed a planned summit with Putin in Hungary, claiming he didn’t want to engage in a “wasted meeting.”

And the White House has reason to feel confident that the oil market can absorb a sanctions shock. The International Energy Agency recently predicted an “untenable” oil surplus of up to 4 million b/d by early 2026 (although the IEA chronically underestimates demand). Perhaps OPEC+ countries, including Saudi Arabia and the United Arab Emirates, have offered assurances that they can keep the market well supplied in the event of dwindling Russian exports.

Trump’s confidence in the oil market has so far been validated. The market reacted to yet another major news story with a collective shrug. Brent crude oil didn’t even rise above $70 per barrel after the sanctions announcement.

Of course, workarounds are inevitable, and a notoriously fickle president could certainly change his stance. But the political and market context has changed. For the first time, it seems the market may be too complacent about Trump’s willingness to pressure Russia.

Guest commentaries like this one are written by authors outside the Barron’s newsroom. They reflect the perspective and opinions of the authors. Submit feedback and commentary pitches to ideas@barrons.com.